The designer Lela Rose cuts to what she sees to be the heart of the present unrest in fashion: “Your core designer customer is going the way of the dinosaur.” For a while, Rose says, she didn’t know what to make of sites like Gilt Groupe. She understood the argument that discounts expose her brand to a youthful demographic, and considered it possible that those buyers might someday graduate to paying retail. But she could see the scenario playing out the other way around just as easily. “They might be saying, ‘That’s what I bought when I had no money,’ and now they’re used to paying the sale price,” Rose says. Nonetheless, she’s decided to give in to the phenomenon, recently doing a sale with Gilt’s competitor, Rue La La. “It’s kind of where shopping is going right now,” she reflects. “This kind of ‘fun, fast, get a great deal’ ethic is very appealing.”
Over the last year, most every label you can name has done a flash sale on one site or another, and the presence of good company has washed away some of the liquidator stigma. Still, few of Gilt Groupe’s suppliers are eager to boast about the relationship. Numerous design firms, including some that Gilt executives told me were important supporters of their enterprise, declined to comment for this story. One got so nervous that a Gilt spokeswoman begged me not to mention her name in this article, despite the fact that the designer’s own publicist had trumpeted her Gilt sales on Twitter.
Robert Tagliapietra, who has done three sales with Gilt Groupe now, is happy to profess his affection for the company, which sponsored one of his label’s Fashion Week shows. But he adds that he, like many others, is concerned that discounting may become a self-reinforcing loop. “You don’t want to train customers to expect sales, because at the end of the day these clothes do cost a lot to make,” Tagliapietra says. Designers pay a great deal for fine fabric and hand-stitching. “Clothes aren’t arbitrarily expensive,” he says. “The profit margins for designer fashion are surprisingly small.”
“Gilt is really there for you to cut your losses—you aren’t making any money,” says another designer—let’s call her Lisa. When Gilt Groupe first reached out to her, Lisa was skeptical, but then she tried out the website, buying something by Helmut Lang. She was impressed by how smoothly the process worked, and she’s since done several sales herself. Why would she, if she’s only breaking even? Lisa explains that selling on Gilt benefits her in several ways beyond liquidation. For instance, the company is now sending buyers to place orders with designers at the beginning of the season, for what is basically planned overstock. When Lisa reaches a certain production threshold, her price per unit goes down, which means that she makes higher margins on the portion of the order that sells at retail. Thus, even though her Gilt sales are a wash, she makes more money overall.
Cutting such deals is one way that Gilt Groupe has attacked a looming problem: sustainability. “This is an easy business to start; it’s a really hard business to scale,” says Susan Lyne, Gilt Groupe’s present CEO, who came aboard in September 2008. (She replaced Alexis Maybank, who remains with the company in a strategy-making role.) Lyne’s hiring marked a major step in Gilt Groupe’s maturation: As a former president of the ABC television network and of Martha Stewart’s multimedia empire, she brought the company serious gravitas. She has overseen a period of furious expansion: Gilt has quintupled the size of its workforce, to almost 350 employees, stepped up its spread into new product lines, and opened a subsidiary in Japan. Two years ago, it conducted three sales a week; now it does an average of 70.
Meanwhile, the business keeps getting more crowded. Competitors like Rue La La are getting bigger, too, and it seems like every day brings the debut of another imitator: Those launched in just the last year include Beyond the Rack, the beauty-products site Market for Drama, and Swirl, a flash-sale spinoff of the DailyCandy empire. Even some high-end department stores, like Saks Fifth Avenue and Neiman Marcus, are experimenting with flash sales on their websites. “We were intrigued with what was going on out there in the industry,” says Denise Incandela, president of Saks’ online division, which thrived last year in comparison with the rest of the company.
The department stores—the actual stores, the ones that sell full-price clothing—still exert enormous power over the industry, and no one expects that dynamic to disappear anytime soon. Designers and Gilt executives say that department stores have been vigilant in watching whether clothes appear on Gilt in advance of their scheduled markdowns on the floor—a big no-no. But many in the fashion industry worry that the success of sites like Gilt is hastening a trend that was gathering steam even before the recession: the decline of the meandering, tactile experience of shopping. “What really scares me the most is, what’s going to happen to department stores, and what’s going to happen to the specialty store?” wonders Lela Rose, who added that she bought almost all of her own Christmas gifts online this year. “Where do we go to touch it, and look at it, and to be inspired?” More important: Where will anyone pay retail?
For Gilt Groupe, the multiplying number of retailers who follow a similar business model has a practical consequence: There’s now far less surplus product to go around. It’s clear that liquidation alone won’t keep the business growing anymore. The inventory left behind by the crash of 2008 has worked its way through the system, and most designers have adjusted their production downward. So as Gilt Groupe’s membership keeps growing, the company has had to work frantically to keep pace with new appetites, and to come up with creative ways to expand its pipeline.